1. (26 points) On 01/01/2014, Company Big (B) acquired 25% of Company Small (S)\

Question

1. (26 points) On 01/01/2014, Company Big (B) acquired 25% of Company Small (S)'s shares. To acquire the shares, B borrowed $ 4,000,000 from bank, paid another 1,000,000 cash out of their own bank account, and issued 100,000 shares to the former shareholders of S. The shares issued have S50 market value per share and S1 face value. In 2015, S made a net profit of $4,000,000, announced and gave out 1,000,000 cash dividend. The share price of S were S15 per share at 01/01/2014 and S18 per share at 12/31/2014 a. For the transaction happened on 01/01/2014, please write down the journal entries for B (5 points) b. For the transaction happened on 01/01/2014, please write down the journal entries for S (5 points) c. Assuming that B has no significant influence over S what accounting method should B use to document their investment? And what are the journal entries that are related to the investment and investing activities during 2014 for B. in other words, what is the balance of investment account at the end of 2014 for B? And what are the journal entries to document the changes in investment account? (8 points) d. Assuming that B controls S, what accounting method should B use to document their investment? And what are the journal entries that are related to the investment and investing activity during 2018 for B? In other words, what is the balance of investment account at the end of 2014 for B? And what are the journal entries to document the changes in investment account? (8 points)

Explanation / Answer

1) a. Journal entries for B on significant control : Date Accounts Titles Debit $ Credit $ 1/1/2014 Equity investment in S 10000000 Bank Loan 4000000 Cash 1000000 Common Shares 100000 Paid in capital in excess of par 4900000 (being purchase of 25% of S) 1/1/2014 Cash 5000000 Common Shares of B 5000000 Common Shares   10000000 (being sale of 25% of voting rights) c. In case no significant influence, the investment should be of "Available for sales". Journal entries for B : Date Accounts Titles Debit $ Credit $ 1/1/2014 Securities available for Sale 10000000 Bank Loan 4000000 Cash 1000000 Common Shares 100000 Paid in capital in excess of par 4900000 (being purchase of 25% of S) 31/12/2014 Securities available for Sale 2000000 Unrealised profit on investment 2000000 (10m *(18-15)/15=2m) 31/12/2015 Cash 250000 Dividend revenue 250000 (cash dividend on investment in securities) Balance of investment account at the end of 2014 = 10m + 2m = $12m d) In case of significant control of B over S, the "Equity investment In S" is maintained. Journal entries for B : Date Accounts Titles Debit $ Credit $ 1/1/2014 Equity investment in S 10000000 Bank Loan 4000000 Cash 1000000 Common Shares 100000 Paid in capital in excess of par 4900000 (being purchase of 25% of S) 31/12/2015 Equity investment in S 1000000 Revenue income in S 1000000 (booking of 25% of control) 31/12/2015 Cash 250000 Equity investment in S 250000 (booking of dividend from S on 25%)

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.